Market Snapshot: U.S. stocks pare losses as rising bond yields weigh on ‘Magnificent 7’ stocks

What’s driving markets

Bonds have resumed command of the stock market of late as higher yields undermine the value of megacap technology stocks, the undisputed market leaders. U.S. stocks extended losses to trade sharply lower on Thursday afternoon.

Long-dated Treasury yields continued to rise Thursday, with the 10-year yield

up 4 basis points, touching its highest level since the 2008 financial crisis, rising north of 4.31%, according to Dow Jones Market Data. Bond yields move inversely to prices.

See: Why Treasury yields keep rising, causing pain for stock-market investors

“The stronger-than-expected economic data is certainly helping push yields higher, but there’s a perfect storm with the Fitch downgrade, with the Bank of Japan’s policy decisions changes, and with the bottoming and ticking back higher in inflation that we’re seeing in the last inflation report,” said John Luke Tyner, portfolio manager and fixed-income analyst at Aptus Capital Advisors.

The Federal Reserve Bank of Cleveland’s model for forecasting near-term inflation readings on Thursday saw headline CPI rising by 3.8% in August from a year earlier and 0.8% on a monthly basis. That is above July’s 3.2% yearly increase and 0.2% of monthly gains.

Despite the fact that such inflation “nowcasts” have tended to overestimate inflation in recent months, it is “likely to put the Fed in the spot where they might have to raise rates again,” Tyner told MarketWatch in a phone interview.

However, Fed funds futures traders are pricing in an 86.5% probability that the Fed will leave interest rates unchanged at a range of 5.25%-5.5% on Sept. 20, according to the CME FedWatch Tool. The chance of a 25-basis-point rate hike to a range of 5.5%-5.75% at the subsequent meeting in November is priced at 37%.

“I think the likelihood of another hike in September is higher than what the market is currently reading,” Tyner said. “I’m sure that people want to hear what Chairman Powell is gonna say at Jackson Hole next week. They want to see more labor reports that are coming out the next month or two.”

Minutes from the Federal Reserve’s July meeting released Wednesday afternoon were being blamed for the latest leg higher in global bond yields. They showed that Fed policy makers could continue raising interest rates amid concerns that inflation could reaccelerate, potentially pushing bond yields even higher.

“It’s really uncertain where terminal interest rates will land given the economy isn’t giving us a decisive picture of being too strong or too weak. It’s keeping the window open for more rate hikes potentially,” said Mohannad Aama, a portfolio manager at Beam Capital Management, during a phone interview with MarketWatch.

Rising yields helped heap more pressure on shares of some of this year’s highflying tech stocks, including Tesla Inc.
TSLA,
Apple Inc.
AAPL
and Microsoft Corp.
MSFT

The elite group of megacap tech stocks which also includes Amazon.com Inc., Meta Platforms Corp.
META
and Alphabet Inc.’s Class A
GOOGL
and Class C
GOOG
shares has been credited with driving much of the Nasdaq Composite’s nearly 30% run-up year-to-date. However, their market dominance has faded in recent weeks as investors have favored other cyclical sectors like energy and materials stocks. Those two sectors were the only two performers trading in the green on the S&P 500 on Thursday, up 1.5% and 0.2%, respectively.

“That’s a theme that’s been bubbling up here over the last three to four weeks, but there’s more of an exclamation point on it now,” said David Keller, chief market strategist at Stockcharts.com, during a phone interview with MarketWatch.

“First you had Microsoft and Apple breaking down a few weeks ago, now you’re getting Meta breaking below its 50-day moving average.”

Keller added that rising bond yields tend to have a bigger impact on growth stocks like technology names, while sectors like energy are more resilient.

“Energy can do just fine in a rising rate environment. energy and materials should probably do better in a relative basis,” he said.

See: ‘This is no longer a buy-the-dip market.’ Why this Goldman Sachs veteran is worried about the stock market.

Corporate earnings were also in focus as investors received results from Cisco Systems
CSCO
and retail giant Walmart Inc.
WMT.
Cisco reported strong quarterly results after Wednesday’s close. Walmart also reported stronger than expected earnings, helping to offset some concerns about the strength of the consumer spurred by Target Corp.’s
TGT
lackluster earnings and guidance from Wednesday. Shares of Cisco rose 3.8%, while Walmart shares turned lower, down 1.8%.

Economic updates released Thursday helped support the notion that the U.S. economy is growing at a faster pace than economists had expected, potentially complicating the Fed’s efforts to tamp down inflation.

First-time jobless-benefit claims fell by 11,000 to 239,000 last week, a sign that layoffs in the U.S. labor market remain low. The Philadelphia Fed factory index also shot higher to 12 in August, up from negative 13.5 during the prior month, a sign that manufacturers in the U.S. could be exiting a slump.

Companies in focus

• Hawaiian Electric Industries Inc.
  HE
  shares fell 20.8% on Thursday after The Wall Street Journal reported that the utility has engaged in talks with restructuring advisers to consider its next steps after the deadly Maui wildfires.

• Shares of Ball Corp.
  BALL
  rose 2% after agreeing to sell its aerospace unit to BAE Systems for $5.5 billion.

• Chesapeake Energy Corp. 
  CHK
   will replace Mercury Systems Inc. 
  MRCY
  on the S&P MidCap 400, S&P Dow Jones Indices said on Wednesday. Shares of Chesapeake were up 5.2%.

• Shares of Cigna Group
  CI
  and CVS Health
  CVS
  dropped 6.9% and 8.7%, respectively, following a report that a major nonprofit health insurer was preparing to shun the pharmacy-benefit industry.

Jamie Chisholm contributed